Detroit's settlement with 2 banks gives city leverage

Saturday

Apr 12, 2014 at 12:01 AMApr 12, 2014 at 11:13 AM

DETROIT - A federal judge approved this bankrupt city's latest attempt to extricate itself from some long-term financial contracts that have been costing it tens of millions of dollars a year. The judge held up the settlement as an example of "the very spirit of negotiation and compromise" that he hopes other creditors will follow.

DETROIT — A federal judge approved this bankrupt city’s latest attempt to extricate itself from some long-term financial contracts that have been costing it tens of millions of dollars a year. The judge held up the settlement as an example of “the very spirit of negotiation and compromise” that he hopes other creditors will follow.

Judge Steven W. Rhodes of U.S. Bankruptcy Court for the Eastern District of Michigan ruled that Detroit may proceed with a plan to pay $85 million to UBS and Bank of America over several months to terminate the financial contracts, known as interest-rate swaps. The city entered into the swaps in 2005 as part of a deal that was supposed to help finance pensions.

Under the settlement, the two banks agreed to back Detroit’s overall plan of adjustment, which is critical for the city’s push to resolve its bankruptcy by early fall. Municipal bankruptcy rules say that if one class of impaired creditors votes to approve the city’s plan of debt adjustment, the judge might be able to impose the terms forcibly on everybody else.

The state law that put Detroit under emergency management is scheduled to expire in September. There are concerns that the case will end up in a quagmire if creditors keep fighting settlement proposals and the bankruptcy remains unresolved by the time the emergency manager ends his term.

The judge’s decision yesterday gives Detroit leverage to seek negotiated settlements with other creditors. Creditors, including unions and financial institutions, had filed objections to the proposed settlement, arguing in part that some liens on casino-tax revenue that Detroit had given the two banks as collateral for the swaps were invalid under state law.

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